PLD-AMB Merger to Prove Lucrative? - Analyst Blog

As a part of a startling development that could redefine the market dynamics, ProLogis (PLD), a leading global provider of distribution facilities, is reportedly in the final stages of negotiation regarding a possible merger with its rival AMB Property Corp. (AMB). Although both the companies refused to comment on the terms and conditions of the deal, the merger is likely to take place based on “an all-stock, at-market transaction” based upon the unaffected trading prices of the participating companies prior to media reports of a possible merger.

According to insider sources, the merger is expected to be the biggest deal since recession involving publicly traded real estate investment trusts (REITs), with the combined entity having a market capitalization of over $13.9 billion.

Since late 2010, mergers and acquisitions have gained a momentum with investors vying for premium assets. In addition, publicly traded REITs have largely benefited from  the access to the public markets that enabled them to fund the transactions.

According to a report published by Jones Lang LaSalle Incorporated (JLL), a leading full-service real estate firm, direct investment in global commercial real estate (CRE) prices will surge by 25% to 35% year-over-year to over $350 billion in 2011 – the highest levels ever recorded since 2008. Jones Lang earlier in its report had predicted that global CRE sales would total about $300 billion in 2010, representing a 50% improvement from 2009. During the first half of 2010, global CRE sales had totaled approximately $130 billion.

ProLogis owns and manages interest in over 2,400 distribution facilities, service offices, and properties spanning 475 million square feet of spacein Europe, Asia, and North America. The company leases its industrial facilities to over 4,400 customers, which mostly include manufacturers, retailers, transportation companies, third-party logistics providers and other enterprises with large-scale distribution needs.

ProLogis integrates international scope and expertise with a strong local presence to ensure accurate and seamless flow of goods to desired destinations. The distribution facilities of the company function as processing centers for goods for its customers, enabling them to store adequate inventory to meet increased demand and mitigate the risks from a possible breakdown in the supply chain.

On the other hand, AMB has a strong portfolio of warehouses and distribution facilities in some of the busiest distribution markets in the world. It operates as a vertically integrated company and enjoys large economies of scale through an extensive knowledge of domestic and international industrial real estate markets. The majority of AMB's portfolio comprises high throughput distribution (HTD), which provides multiple options for quick movement and distribution of goods.

HTD properties are warehouses or other industrial properties that are located near airports, seaports, and ground transportation facilities, which enable rapid distribution of customers' products. These HTD centers are typically located in areas characterized by global ports, which enable the company to gain a significant pricing advantage.

The potential “merger of equals” involving both ProLogis and AMB is expected to create a behemoth of the sort in the industrial real estate industry. The combined entity is expected to be based in San Francisco and would initially retain both the chief executive officers in their respective posts. With the news of the plausible merger , share prices of ProLogis have jumped 8.16% to $15.90 in after-market trading in New York, while that of AMB skyrocketed by 9.56% to $36.00.  

We presently have a ‘Neutral' rating on both ProLogis and AMB, which currently have a Zacks #3 Rank that translate into a short-term ‘Hold' recommendation indicating that the stocks are expected to perform in line with the overall U.S. equity market for the next 1–3 months.